Earnings Report /
Egypt

Telecom Egypt: Solid Revenues, Margin Expansion, Lower Debt on Vodafone Special Dividends

  • Data revenues continue to drive growth

  • FX gain, investment income from Vodafone and lower interest expense drive bottom line

  • Modified shareholders' agreement, a favorable revenue mix, normalized capex; upgrade FV to EGP18.00/share

Al Ahly Pharos Securities Brokerage
11 November 2021

Data revenues continue to drive growth

ETEL reported 3Q21 revenues of EGP9.0 billion, compared to EGP7. 4 billion in 3Q20 and EGP8.97 billion in 2Q21 (+21.7% YoY, +0.4% QoQ). Retail revenue grew by 22.9% YoY and 3.8% QoQ (contributing c.64.9% of total revenues, +0.7pps YoY, +2.1pps QoQ), driven by a YoY increase of 25.6% YoY and 6.3% QoQ in Home and Service revenues.

During 9M21, ETEL recorded revenues of EGP26.4 billion, an increase of 18.0% YoY, driven by a significant YoY growth in data revenues of 31%.

Home and consumer data continued to drive growth during 3Q21 (+25.6% YoY, +6.3% QoQ), fueled by a growth of 16.4% YoY and 2.9% QoQ in Home and Consumer ADSL subscribers to stand at 7.4 mn subscriber, along with a moderate increase of 8.8% YoY and 2.5% QOQ in Home and Consumer Data ARPUs to reach EGP148.4 per month in 3Q21.

Home fixed voice revenues showed a moderate growth of 9.5% YoY, and 5.8% QoQ. The increase is on the back of an increase of 17.7% YoY and 3% QoQ in fixed voice subscribers base to reach 9.4 million subscriber in 3Q21, given a slight growth of 1.8% QoQ and a decline 0.8% YoY in fixed voice ARPU per month to EGP25.5 per month in 3Q21.

Management noted before that ETEL has not seen a big jump in data traffic, since the first wave of Covid-19, however, the traffic created by wave 1 was sustained. This is attributed to the fact that schools and offices are still partially working from home or on rotational basis. Another factor driving the sustained demand is content, a new phenomenon in Egypt, where international players come into the Egyptian market, with specifically dedicated content, similar to Netflix, OSN and Watch It.

Enterprise solutions revenues witnessed an increase of 12.7% YoY and a slight decline of 5.7% QoQ, reaching EGP1.12 billion in 3Q21. This is attributed to a significant increase in enterprise data revenues of 30.3% YoY, along with increased managed data services revenues and revenue from subsidiaries.

Mobile customers registered 7.71 million subscribers in 3Q21 (+8.7% YoY, -5.3% QoQ), where the quarterly decline is due to the enforced decisions by NTRA in April 2021, limiting the line validity to 90 days active for pre-paid customers and 180 days for postpaid customers; accordingly around 429k customers were disconnected in 3Q21.

Wholesale revenues showed a modest growth of 19.4% YoY and -5.4% QoQ, recording EGP3.16 billion in 3Q21.

Revenues from Domestic Wholesale recorded an increase of 46.8% YoY and 15.3% QoQ, driven by IRU sales., offsetting a decline of 8.0% YoY and 10.4% QoQ in International Carrier Affairs, on lower demand for international calls.

International Customers and Networks (IC&N) recorded an increase of 20.9% YoY and a decline of 29.6% QoQ, where the annual increase is dependent on higher demand on infrastructure services, while the quarterly decline is dependent on a strong base effect (recognition of EGP294 million in 2Q21).

Margin expansion on a favorable revenue mix

Gross profit came in at EGP3.94 billion in 3Q21, showing an increase of 45.8% YoY and 5.7% QoQ; implying a GPM of 43.8% in 3Q21 (+7.2pps YoY, +2.2pps QoQ). This was mainly driven by a favorable revenue mix towards higher retail revenue (high margin) contribution and faster growing revenues than COGS. EBITDA came in at EGP3.58 bn in 3Q21 (+44.7% YoY, +2.6% QoQ), implying an EBITDA margin of 39.8% (+6.3pps YoY, +0.9pps QoQ).

During 9M21, gross profit came in at EGP11.1 billion (+29.4% YoY), implying a margin of 42.1% in 9M21. EBITDA came in at EGP10.3 billion (+37.2% YoY), implying a margin of 39.1% in 9M21.

FX gain, investment income from Vodafone and lower interest expense drive bottom line

Net profit came in at EGP2.2 billion in 3Q21 (+51.0% YoY, +27.4% QoQ); implying NPM of 24.7% (+4.8pps YoY, +5.3pps QoQ). For 9M21, net profit came in at 6.09 billion, a significant increase of 72.5% YoY. Bottom line performance during 9M21 is mainly attributed to:

  • solid operational performance,

  • an increase in net finance income of 149% YoY, on the back of EGP433mn FX gain, compared to EGP173mn last year,

  • a decline of EGP135mn in impairment costs,

  • a decline of 7% YoY in net interest expense, attributed to 11% YoY decline in gross debt, reaching EGP16.1 billion as of September 2021, compared to EGP20.3 billion as of December 2020; on the back of utilizing dividends received from Vodafone,

  • a decline in the effective interest rate, which stood at 5.6%, compared to 6.3% last year,

  • and higher investment income from Vodafone on the back of reversal of provisions amounting to EGP350 million along with solid operational performance.

Modified shareholders' agreement with Vodafone, a favorable revenue mix and normalized capex support cash flows; upgrade FV to EGP18.00/share 

We upgrade our valuation of ETEL to EGP18.00/share, up from EGP16.22 and maintain our OW recommendation; after taking into account the following:

  • ETEL’s modified shareholders agreement requires Vodafone Egypt to pay a minimum dividend payout ratio of 60% of free cash flow going forward,

  • Capex normalization, with capex standing at 24.5% of sales in 2022f and gradually going down to stand at 23% in 2026f,

  • Solid revenue growth accompanied by margin expansion, on the back of strong (high margin) data and retail revenue growth,

  • and updated our macro and WACC assumptions.

Collectively, these led to cashflow improvements and operational margin expansion.

Data revenues (both fixed and mobile) continue to drive ETEL’s revenue growth, where the data traffic and demand generated by covid-19 are sustained, supporting ETEL’s plans to invest in its network along with enhancing customer experience and solidify its market positioning. 

Other than retail revenue, we believe that ETEL will continue to benefit from digital transformation projects by the government, where the company is is looking at expansion beyond the initial plans into communities, where urban communities are expanding beyond greater Cairo and Alexandria; dedicating expansion plans to new cities that the government is looking at, similar to New Alamien, New Ismailia and New Portsaid; which are likely to attract more customers in the future.

Telecom Egypt is currently trading at 2022f P/E of 3.3x, lower than its historical 5yr and 10yr P/E average of 5.9x and 7.3x, respectively, and is at a significant discount to peer group average of 11.6x. ETEL is currently trading at 2022f EV/Adjusted EBITDA of 2.3x, at a significant discount as well to peer group average of 8.8x.